FRAMEWORK FOR CASE ANALYSIS A. Situational Assessment / Environmental Scan – the broad view look at: CREST(N) Competitive Landscape – Is it a competitive industry? Who are primary competitors? What are they doing? Regulatory - Three levels of government – who are they? what can they do to change your business environment? Economic Factors – how is the economy doing? Social Trends – what’s happening? what’s changing? Technological factors- that would affect our business Natural Factors- how does the environment enter into this? AND/OR: Porter’s Five Forces: Competition in the industry; Potential of new entrants into the industry; Power of suppliers; Power of customers; Threat of substitute products. B. SWOT Analysis Strengths / Weaknesses – internal assessment Opportunities / Threats – external assessment C. Problem Statement What is the primary problem in the case? Make sure you understand the difference between the actual problem and symptoms of it D. Alternatives List 4-5 – what can be done? E Criteria/evaluation What will you use to measure each alternative? (eg staff turnover? Staff motivation? profit? market share? survival?) F Analysis of the Alternatives What would be the pros and cons of each? How does each measure up against the criteria? G. Recommendation Which alternative would you recommend? H. Action Plan Who? What ? When? Where ? Why? How? I. Contingency Plan Briefly – in case your first plan of action isn’t quite working? 1. Nova Scotia Community College SMU Strategic Management Edward McHugh MGMT 4489 Fall 2018 SMU Strategic Management Edward McHugh MGMT 4489 Fall 2018 Nova Scotia Community College Table of Contents The Globalization of the NFL............................................................................................................5 Yunnan Baiyao: Traditional Medicine Meets Product/Market Diversification..................................23 YMCA of London, Ontario...............................................................................................................41 Residential Child-Services Facility (A): A CEO’S Effort to Preserve Morale...................................57 9 -7 1 1 -4 5 5 REV: OCTOBER 25, 2012 JUAN ALCÁCER MARY FUREY The Globalization of the NFL If you want to dream 20 years into our future, you could see 50 NFL teams located in Europe, Asia, and throughout the world; stadiums with amenities that are as good as your own living room; televisions on the back of the seat in front of you, allowing you to watch every game in the league and see every replay before the referees . . . and an enormous television audience. — Former NFL President Neil Austrian, 19981 In the twenty-first century, the globalization of most major American sports continued to gather steam. By 2010, 28% of the players in Major League Baseball (MLB) were foreign born, hailing predominately from Latin America and Asia.2 In the National Hockey League (NHL), 33% of the players came from outside North America.3 The number of foreign players in the National Basketball Association (NBA) had increased to 20% in recent years. 4 Indeed, whether or not you were a fan of professional basketball, you had probably heard of Shanghai-born Yao Ming, who, at seven feet, six inches in height, was the tallest player in the NBA. This globalization had practical positive consequences. Fan bases were expanding in tandem with the diversifying player base. The 2010 NBA finals, which pitted the Boston Celtics against the Los Angeles Lakers, was broadcast in 215 countries and territories, in 41 languages, and attracted the largest global audience in the NBA Finals history to date. 5 Yet the most valuable sport league, the National Football League (NFL) (see Exhibit 1), continued to have trouble attracting both a global roster of players and an international fan base despite systemized attempts at globalizing since 1991. While the Super Bowl was wildly popular among U.S.based spectators—the 2010 game drew in 106 million viewers, making it the largest telecast ever— outside of North America only a few million people watched the game, most of them expatriate Americans.6 Why hadn’t the NFL had as much success globalizing as the NBA, MLB, and the NHL? Was it simply a bad idea to try to export football, a sport that many considered uniquely American? Or was it, rather, a good idea that had been poorly executed? ________________________________________________________________________________________________________________ Professor Juan Alcácer and Research Associate Mary Furey prepared this case with the assistance of Research Associate Toomas Laarits. This case was developed from published sources. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2011, 2012 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-5457685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School. 5 For use only in the course SMU Strategic Management at Nova Scotia Community College taught by Edward McHugh from September 10, 2018 to December 03, 2018. Use outside these parameters is a copyright violation. 2. The Globalization of the NFL Economics of U.S. Sports Franchises Revenues Professional sports leagues in the United States generated revenues through three primary channels: television and media rights, licensing fees and merchandise sales (including sponsorship), and ticket sales, which included all stadium-generated revenues, such as concession-stand sales. Television rights were the most lucrative component of the revenue model. Of the professional sports leagues in the U.S., the NFL drew the largest audience, with TV revenues contributing nearly half of NFL revenues.7 The television revenues for American sports leagues that had successfully managed to become global, increased with the opening of new markets. For example, in 2004, Dentsu, the Japanese advertising giant, agreed to pay MLB International (MLBI) $275 million over six years for the television rights to its games.8 The decision to make this deal was due largely to the success of Japanese players on U.S. teams, such as Hideki Matsui and Ichiro Suzuki (see Exhibit 2). The NFL differentiated itself from other American professional sports leagues by operating under a revenue-sharing scheme that distributed the amount generated from both national and local television rights to each of its 32 teams. Teams such as the New Orleans Saints, which played in small media markets, received the same amount of broadcasting revenue as the New England Patriots or the New York Giants, which operated in the largest markets. And the pie was big: in 2006, the NFL negotiated deals with television networks CBS, Fox, NBC, and ESPN that totaled $20 billion over the course of five to seven years (through the 2011 season for CBS, Fox, and NBC; and through the 2013 season for ESPN). (See Exhibit 3 for NFL revenues from TV broadcasting since 2006.) A 2011–2014 deal with DirectTV guaranteed each team another $31 million.9 While most other professional sports leagues shared the revenues from national broadcasting contracts to a certain extent, revenue for local broadcasting rights was there for the taking. For example, the NBA’s New Orleans Hornets received the entirety of its estimated $9 million deal with Cox Sports Television, New Orleans’s regional sports network. 10 Revenues from merchandise sales and ticket sales were also shared among the 32 teams in the NFL. Regular season gate receipts were split 60% to the home team, 40% to the visiting team. Ticket sales revenue was shared in MLB as well; visiting teams in the American League got 20%, while visitors in the National League got 5%. This was not the case for the NHL or the NBA.11 However, stadium-naming rights and revenues from luxury boxes were not shared between professional sports leagues, so when a stadium was built or renovated, the team associated with it generated more ancillary revenue. An example is the new Dallas Cowboys stadium, which was completed in May 2009. A one-time fee existed for club-level seats, which ranged from $16,000 to $50,000.12 Concessions were not cheap, either. A Kobe beef burger cost $13, while a pizza delivered to a luxury suite cost $60.13 The more expansive the reach of a league or franchise, the more money it pulled in through its various revenue streams. For example, from 2000 to 2006, MLB-licensed merchandise sales in Japan increased 183%.14 In 2006, the NHL received 30% of its global consumer products licensing outside of the U.S. (80% of which came from Canada). Approximately 35% of NBA-related paraphernalia sales occurred outside the U.S., a figure expected to increase by 30% in 2010. 15 The NFL, in turn, received only 12% of its licensing business from outside the U.S.16 2 6 For use only in the course SMU Strategic Management at Nova Scotia Community College taught by Edward McHugh from September 10, 2018 to December 03, 2018. Use outside these parameters is a copyright violation. 711-455 711-455 Costs Equipment Equipment costs for the major U.S. sports varied greatly; this was particularly true for contact sports. American football was more expensive to play than basketball, which required only a ball and a hoop. A young person who was serious about developing football skills required not only a ball, but also equipment such as helmets, shoulder pads, and protective gear. However, football was not as expensive as hockey, where the average cost for one high school varsity player was $385 (see Exhibit 4). Salaries Because exorbitant salaries were often paid out to attract top talent to a particular team, player salaries were the largest single expense for all professional sports leagues, typically representing 65% of a team’s operating expense. 17 Thus, many leagues, including the NHL and NBA, imposed salary caps. In 1993, the NFL inked a collective bargaining agreement (CBA) that limited the amount of money (including base salary, performance pay, and signing bonuses) a team could give its players. Major League Baseball took a slightly different route; rather than place a cap on salaries, it imposed a luxury tax on teams whose annual payrolls were higher than a specific annuallydetermined amount. (In 2010, this amount was $170 million).18 The NFL introduced salary caps in 1923, limiting the amount any player could earn in one game to $1,800.19 In March 2006, the NFL renegotiated the CBA to extend to at least 2010, giving players 59.5% of total NFL revenue over six years.20 During the 2010 season, however, NFL owners decided to opt out of the CBA to reduce the amount spent on salaries and to create surplus cash to upgrade stadiums. There were also the salaries of the coaches, training staff, team doctors, and other staff, that had to be paid. Bill Belichick, head coach for the New England Patriots, was the NFL’s highest-paid coach, signing a deal in 2007 that net him an average $7 million annually until 2013. 21 Stadiums One of the main ways for sports franchises to increase their revenues over time was to enhance the quality of amenities offered at sports stadiums. Thus, many teams invested in the cost of modernizing and upgrading their facilities. In the 1980s, football stadiums that featured luxury amenities such as sky boxes were being built. The new stadiums were paid for through a combination of funds from the team itself, municipal bonds, and NFL backing. Other sports leagues were not as generous. The New York Mets had to pay for a new home, Citi Field, which opened in 2009 at a cost of $850 million. The City of New York issued municipal bonds for the stadium, which the Mets had to repay with interest. Citigroup agreed to pay $20 million a year over 20 years for naming rights to the stadium. While some die-hard Mets fans might have missed the atmosphere of Shea Stadium, Citi Field offered more opportunities to generate revenue through more luxury suites and concessions. Value Chain In the U.S., most athletes developed their skills during childhood, either learning the game from their families or through organized sports clubs, and they honed those skills on high school and college teams. Thus, the first step in the value chain for professional sports leagues—the acquisition of talent through scouting and recruiting exercises—was aided by active grassroots participation at junior levels. In baseball and basketball, the professional leagues in other countries eased the interchange of players across borders. For example, Hideki Matsui played for the Yomiuri Giants of Nippon Professional Baseball for 10 seasons before playing for the New York Yankees; Yao Ming played for the Chinese Basketball Association’s Shanghai Sharks before becoming a Houston Rocket. 3 7 For use only in the course SMU Strategic Management at Nova Scotia Community College taught by Edward McHugh from September 10, 2018 to December 03, 2018. Use outside these parameters is a copyright violation. The Globalization of the NFL The Globalization of the NFL But intra-country, there was also a process to become a professional athlete. Using baseball as an example, players had three main avenues to make it onto a team in the major leagues. First, the entry draft, established in 1965, was available to residents of the U.S., Canada, and Puerto Rico. Those eligible were high school graduates who had elected not to continue onto college, college players who were 21 or older, and junior college players. Often, these picks spent several years playing in the minor leagues, on teams located in smaller cities that did not garner the same fanfare and media attention as major league teams but were often used as developmental leagues for their major league affiliate. There were several levels within the minor leagues, ranging from Triple-A, the level below the majors, to Rookie, which offered a shorter season than the class A league. The Boston Red Sox, for example, had seven minor league teams from which to cull talent: the Pawtucket Red Sox (Triple-A), Portland Sea Dogs (Double-A), Salem Red Sox (Class A-Advanced), Greenville Drive (Class A), Lowell Spinners (Class A-Short Season), and the two Rookie teams, Gulf Coast League Red Sox and Dominican Summer League Red Sox. The second path to the majors was through standing agreements between MLB and leagues in other countries, such as Japan, Mexico, and South Korea. In 1998, the protocol agreement between MLB and Nippon Professional Baseball formalized the process of “posting,” which allowed a club to auction off the rights to one of its players. In 2007, the Boston Red Sox acquired Daisuke Matsuzaka through posting, and the process garnered Japanese baseball more than $51 million. Japanese players could also be traded to the MLB after playing nine seasons in Japan’s majors.22 The third path to the majors was through the free agency that operated across Latin America. In the past, teams used free agency to recruit players at a lower cost. In 2000, the Cleveland Indians signed 40 Latin American players for $700,000, compared with the $1 million-plus offered to their first-round draft pick, an 18-year old American pitcher.23 However, in recent years, the league had been investing more in the amateur draft. According to one scout, “I didn’t think that I would say this three years ago, but Latin America is becoming more expensive than the draft.” ESPN reported that the signing bonus given to players from the Dominican Republic had more than tripled. 24 The next step in the value chain was the production of the game. In addition to the sporting event itself, increasing attention was paid to the overall entertainment experience, with teams competing to outdo each other in hoopla and razzle-dazzle. The cheerleading squad of the Dallas Cowboys became famous in its own right for the quality and level of performance in halftime shows. This showmanship existed even at the college level: the University of Virginia Cavaliers often began home games with their mascot, a man mounted on a white horse, who rode into the stadium, waved a sword, and led the players onto the field. The hype, at times, overshadowed the games themselves. For example, a 2010 Nielsen survey revealed that 51% of Super Bowl viewers 25 tuned in for the traditionally over-the-top commercials—spots for which advertisers paid top dollar ($2.5–$2.8 million for a 30-second spot).26 Finally, there was the sale of merchandise affiliated with the game, including television rights, stadium-generated sales, and team paraphernalia. Globalization of U.S. Sports MLB Major League Baseball first began to expand in 1961, as the league switched from rail transport to airplanes.27 The 1970s brought the “free agent,” a player who could sell his services to the highest 4 8 For use only in the course SMU Strategic Management at Nova Scotia Community College taught by Edward McHugh from September 10, 2018 to December 03, 2018. Use outside these parameters is a copyright violation. 711-455 711-455 bidder. The draft system excluded foreign players, so teams had to pay outright for any foreigners who they wanted to sign. Baseball had a long history of globalization. Horace Wilson, an American professor at Tokyo University, had been credited with introducing the game to Japan as early as 1867. 28 The sport caught on easily in the country because its team-oriented nature fit well with Japanese group culture. Throughout the next decade, American missionaries continued to help spread the sport. The U.S. occupation of Japan finally solidified baseball’s popularity. As the scars of the war healed, a shared passion for the game between members of the two nations grew. 29 Cubans had been playing baseball since 1866 as a result of trade with the United States; American and Cuban sugar executives introduced the sport to the Dominican Republic shortly thereafter. When the U.S. embargo was imposed on Cuba in the 1960s, scouts who would have gone there turned instead to the Dominican Republic. Throughout the 1970s and 1980s, MLB scouting evolved from infrequent expeditions to more formalized and permanent development camps, as a way for major league clubs to cultivate talent and maintain a presence in the host nation. In 2010, Dominicans represented the largest group of foreigners, with more than 400 teenage players entering the major league system each year.30 The game was also exported to Venezuela in the late nineteenth century by students who had returned from studying in America, and later by oil executives on assignment there in the 1920s. In 1989, Major League Baseball International (MLBI) was set up to engender “worldwide growth of baseball and the promotion of Major League Baseball and MLB Club trademarks and copyrights through special events, broadcasting, market development, licensing, and sponsorship initiatives.”31 The program, with a presence in New York, Tokyo, Sydney, London, and Beijing, unsurprisingly had the most success in Asian and Latin American countries, places where baseball had already been played for many years. Expansion efforts continued throughout the 2000s, with a particular focus on Asia. The 2004 season opener was played in Tokyo, the first opener played outside of the U.S. in the league’s 128year history. In 2007, MLBI also launched its Play Ball! Program—a grassroots youth baseball initiative—in five cities across China. NBA International expansion was on David Stern’s agenda when he became commissioner of the league in 1984. Stern quickly began negotiating with foreign media outlets. According to Matthew Brabants, vice president of International Media Distribution for the NBA, “[Stern] would literally get on the phone and negotiate the deals with broadcasters around the world, and the first TV deal he did was in Italy in the early ‘80s.”32 While the NBA had been playing regular season games abroad since 1991, by 2010 it was spending “the better part of $200 million” on international expansion efforts, with its sights set mainly on China. According to Stern, “We are growing the game through the Chinese Basketball Association. We have worked with them, and there are brand-new buildings in cities like Shanghai, Beijing, and Guangzhou, and more are coming. The infrastructure is improving, as are TV arrangements.”33 Largely due to the popularity of Yao Ming, basketball had become the most popular sport among children in China. (Ming’s 2002 debut game with the Houston Rockets was watched by 300 million people in China). However, it is crucial to note that basketball was not new to China. It was 5 9 For use only in the course SMU Strategic Management at Nova Scotia Community College taught by Edward McHugh from September 10, 2018 to December 03, 2018. Use outside these parameters is a copyright violation. The Globalization of the NFL The Globalization of the NFL introduced in 1893 and was curiously allowed to continue being played during the Cultural Revolution when virtually all other Western influences were eradicated. (Indeed, two antique basketball courts survived in Beijing’s Forbidden City). In fact, the love of basketball was so entrenched in China that allegiances transcended national loyalties: According to Frank Sha, a sports marketer in Beijing, the most popular NBA players were Kobe Bryant and Allen Iverson. 34 Even baseball supporters not associated with the NBA did their part to develop the game worldwide. To tap talent in West Africa, Rob Orellana, a former basketball coach, set up the Arona Basket Sur Academy, an amateur development camp located in Spain’s Canary Islands. According to Orellana, “the thinking is to get [the kids] to the States. But if [they] are academically unable to get into college, then we can get them to clubs all over Europe.” 35 However, Orellana noted that NBA teams needed to set up year-round professional development academies if they really wanted to unlock the potential on the continent. In May 2010, the NBA opened its first field office in Johannesburg, South Africa, which was tasked with planning local basketball games and related events and forging partnerships with various incountry media and consumer products companies. Similar offices were scheduled to open in India, Russia, and Brazil by year’s end. 36 Some, however, doubted the efficacy of these tactics. According to Alan Klein, a sports writer: [G]rowing the game has to have an ideological component—something that makes kids dream and fantasize about the game. Michael Jordan did more to spread the gospel of the National Basketball Association than any combination of its programs and marketing. In the twenty-first century, that is the role of television and marketing. 37 David Carter of the University of Southern California’s Sports Business Institute addressed the role of advancing technology—particularly Internet streaming—in the NBA’s success in establishing a global fan base. He reflected, “The real upside over time is to truly turn the NBA into a global league.”38 NHL The NHL had the clearest financial incentive to move overseas because it did not operate under a revenue-sharing agreement. Furthermore, NHL players actually earned slightly more from their overseas games than from their average home game. In 2007, Jeremy Jacobs, chair of the NHL board of governors, spoke of both the near-term and long-term financial gains from games played in Europe: “Your collateral businesses will do well there . . . The league will profit by their exposure over there over time. It will make our televised product more valuable to them.” 39 Foreigners on NHL teams came mostly from European countries such as Russia, with the majority of the rest hailing from Canada. By the mid-2000s, however, the dynamic was beginning to change. In 2001, 49% of NHL picks were from Europe; in 2009, they were down to 25%. Several factors contributed to this decline, including the 2007 development of Russia’s Kontinental Hockey League, the implementation of salary caps, and amended rules for European players that required teams to sign them within two years rather than holding them indefinitely.40 In 2008, the NHL commissioner announced the possibility of expanding across the Atlantic with teams based in Europe within 10 years. It seemed like a logical step, with Europeans composing 30% of all NHL players, and 35% of unique users on NHL.com coming from Europe. The difficulty in establishing the league would be more financial than ideological: Could the European league generate enough revenue to compete with the North American teams? According to NHL’s deputy commissioner, “the North American economy has a certain demand for North American sports 6 10 For use only in the course SMU Strategic Management at Nova Scotia Community College taught by Edward McHugh from September 10, 2018 to December 03, 2018. Use outside these parameters is a copyright violation. 711-455 711-455 content. I’m not sure that, in the short term, most European economies match that level of demand in terms of types of prices you could charge.”41 History of the NFL Modern football evolved from elements of both soccer and English rugby. One major development in the new sport was the ability to pass the ball forward; whereas rugby players were only allowed to pass the ball backward or laterally. Walter Camp, a football player at Yale University, was credited with formally changing the rules of the sport at the Massasoit Convention in 1876. The American Professional Football Association was established in Canton, Ohio, in 1920 as a 14team league. It became the NFL in June 1922. In 1926, a rival American Football League (AFL) emerged and began to poach talent from the NFL. In June 1966, the two rival factions announced that by 1970 they would merge and expand to 28 teams. By 2010, the NFL was a 32-team league with a regular season of 16 games. The league was extraordinarily successful: NFL teams occupied more than half of the top 10 most valuable sports franchises worldwide (see Exhibit 5). NFL Attempts to Globalize The NFL first ventured abroad in 1950, holding an exhibition game in Canada. In 1976, Tokyo hosted the first NFL game played outside North America, and many pre-season games were intermittently played abroad since then. The American Bowl—a set series of preseason games played internationally—ran from 1986 to 2005. The World League of American Football, 1991–1993 The first formal attempt at globalization resulted in the establishment of the World League of American Football. Partially owned by the NFL, the purpose of the league was to not only spread football beyond U.S. borders, but to also serve as an off-season training platform for the development of players. This league was initially expected to have 12 teams—six in the U.S., one in Canada, one in Mexico, and four in Western Europe. When the league officially launched, it had only 10 teams: six from the U.S., three from Europe, and one from Canada. Games were to be played from mid-March until early July, so as not to compete directly with the NFL regular season. The inaugural season kicked off in March 1991, with weekend games played in Alabama, California, Florida, Germany, and Spain. Coca-Cola offered sponsorship. Television networks ABC and USA each broadcast one game each week. The two teams that made it through the playoffs met in the World Bowl, the World League’s equivalent of the Super Bowl. Despite corporate backing, with an average game attendance of only about 25,000, the operation was shut down after just two seasons. The World League, 1995–1997 In 1995, under the shortened name World League, the NFL re-launched the program as an exclusively European operation of six teams (three from the initial program). The teams were the Amsterdam Admirals, the Barcelona Dragons, Frankfurt Galaxy, the London/England Monarchs, Rhein Fire, and the Scottish Claymores. NFL Europe, 1997–2006 In 1997, the league rebranded again and became known as NFL Europe. In 2002, the world-class Barcelona Futbol Club (FC Barcelona) worked with the NFL to try to boost the profile of the league in 7 11 For use only in the course SMU Strategic Management at Nova Scotia Community College taught by Edward McHugh from September 10, 2018 to December 03, 2018. Use outside these parameters is a copyright violation. The Globalization of the NFL The Globalization of the NFL Europe by bringing the Barcelona Dragons into their organization. Despite the strength and popularity of the FC Barcelona franchise, the Dragons failed to gain popularity, fell into financial trouble, and ultimately disbanded in 2003. NFL Europa, 2007 For its last season, the league officially changed its name to NFL Europa, to appeal to Europeans. The league disbanded for good in 2007, after having lost $20 million each year.42 At that point, five of the six teams were located in Germany, which had the most established youth sports development infrastructure of all the countries in Europe. 43 (See Exhibits 6a and 6b.) The decision to dismantle the program was two-fold. First, NFL owners could no longer justify the expense without any return in profit. And more important, the experiment had failed in the past several years to develop those star NFL players for which it was designed. In fact, the league boasted only two success stories—Kurt Warner, who played for Amsterdam in 1998, and Jake Delhomme, who was on the Frankfurt team in 1999. “I cut my teeth there and got to play a lot there, so I learned a lot,” Delhomme said. “To me, it’s a quarterback’s league. That’s what I believe. That’s what I believe it was made for, to allow young quarterbacks to play and grow.”44 Most observers contend that football coaches were more comfortable opting to develop their players during the off-season with their own staff under their direct supervision, as opposed to trusting unknown staff across the ocean. According to one sports journalist: Truth be told, over the past four or five years, the biggest advantage to having the European league was that the NFL could use it as a testing ground of sorts. Coaching interns, novices trying to get some experience and willing to spend four months abroad to do so, comprised many of the football staffs. The NFL used NFL Europa to groom game officials. And when the NFL’s powerful competition committee wanted to sample a potential rule change, to see how it affected the game in application instead of theory, it could tinker with those changes by enacting them in NFL Europa first.45 Drive Abroad: Incomplete In its first drive abroad, the NFL pointed to its healthy foreign television rights and the millions of viewers the Super Bowl attracted—800 million people across 150 countries in 1997—as a rationale for expanding abroad. But according to a marketing director of a U.S. sports league, “The Super Bowl is one day a year, and the world reacts to it much in the same way as a Broadway play. It opens, you go once, and then you go home.”46 Sports could be exported indirectly through the sale of media rights, but in the absence of local loyalties, fan support often declined. American football, said Jerry Jones, owner of the Dallas Cowboys, was predicated on “my town against your town” rivalries, which were best suited for home stadiums.47 In U.S. football, the emotional connection to homegrown and emotionally charged competition was reinforced by sporting events at the college level, where team rivalries were deep seated, longstanding, and at times, a bit fanatical. After the NFL’s failed attempt at globalizing football by establishing the European league, Mark Waller, head of NFL’s international operations, said, “It’s got to be the NFL. It can’t be the European League.”48 Mr. Waller believed that digital media was integral to attracting and retaining new fans. 8 12 For use only in the course SMU Strategic Management at Nova Scotia Community College taught by Edward McHugh from September 10, 2018 to December 03, 2018. Use outside these parameters is a copyright violation. 711-455 711-455 High-definition television and the NFL website enabled newcomers to get “close to the stratagems and the sweat. The only way you could do that before was to get on a field.” 49 In 2004, the NFL launched the International Development Practice Squad Program. Its aim was to expose a few foreign-born players to the NFL by allowing them to get practice time with professional athletes without playing in a real game.50 According to Philippe Gardent, a player from France and one of the eight in the 2006 program, “The advantage is you can’t be cut. The disadvantage is you can’t be used in a real game. But I see it as a great opportunity to have one year to show the coaches and teammates here that I’m for real. I’d certainly be prepared to play if they asked me to.”51 Commenting on the program, the senior director for international public affairs for the NFL said, “It's all about expanding the game outside the United States. You can do so much with television. You can do so much with marketing, but in the end, when you have a homegrown player on an NFL team, there’s nothing like that to develop enthusiasm for your game.”52 The generally accepted reason as to why the previous expansion efforts were not met with overwhelming success was that audiences were aware they were not seeing the best talent, and thus, were less interested. According to NFL’s Waller, “In soccer, there’s global recognition that the English Premier League and Champions League generate the most appeal. In [football], the regular season, the playoffs, and Super Bowl are as good as it gets.”53 In 2005, the NFL launched what was known as the International Series and held its first regular season game in Mexico City, under the name NFL Futbol Americano. The game drew record numbers and a 20% increase in annual revenue from Mexico in the following years.54 The NFL began to think it had the strategy sorted out, which was a rather simple one: Begin to establish a fan base by playing games in a foreign country, and the sponsorship and media deals will eventually follow. In 2007, Waller said, “It starts with growing the popularity of the sport with fans. That leads you to broader media coverage, more digital media, more ability to physically attend games and, ultimately, why not a franchise?”55 In October 2007, London’s Wembley Stadium held the first NFL regular season game played outside of the Americas. As part of the NFL’s five-year internationalization plan, England continued to host one game a year through 2010. Alistair Kirkwood, NFL Europe’s vice president of strategic planning and development, said, “To have regular season games played in some of our key worldwide markets is a top-down strategy that is more reflective of the world today where media plays such a crucial part.”56 Since the first regular season NFL game was played in London in 2007, interest in the game among spectators in the U.K. increased, with television viewership doubling by 2010.57 In October 2010, NFL commissioner Roger Goodell, speaking about his hope for the future, said, “I think the next step will be multiple games in Europe. And if that’s successful then I think the idea of a franchise here is realistic.”58 The NFL’s Next Play The NFL tried to expand its product into new markets by staging events, and later, regular season games on foreign soil. Was this a successful strategy? Was it possible to create a fan following in countries without the embedded sport infrastructure? Or did the following commentator say it best? “You can’t produce your product in one country and sell it in another. You can do it with laptop computers, but you can’t do it with a game.”59 9 13 For use only in the course SMU Strategic Management at Nova Scotia Community College taught by Edward McHugh from September 10, 2018 to December 03, 2018. Use outside these parameters is a copyright violation. The Globalization of the NFL The Globalization of the NFL Exhibit 1 Value of Professional Sports Franchises OVERALL STATS Season League revenue (US$ billions) Overall Operating Income (US$ millions) Average Team Value (US$ millions) TICKET SALES Number of Teams Average Game Attendance, 2008 # of Regular Season Games Average Ticket Price, 2008 (US$) Estimated Ticket Revenue, 2008 (US$ millions) MLB NFL NBA NHL 2009 6.2 501 482 2009 6 790 1000 2008/09 3.2 318 379 2008/09 2.4 141 220 30 32,516 162 25.4 2,007.0 32 68,034 16 72.2 1,257.5 30 17,497 82 48.8 1,050.9 30 17,476 82 48.7 1047.3 2,025.9 1,687.7 324.4 409.6 SPORTS LOGO MERCHANDISE 2009 Expenditures for Sports Logo Apparel (US$ millions) Source: Compiled from Plunkett’s Sports Industry, 2010; and SBRnet, accessed December 2010. Exhibit 2 Television Rights for MLB vs. NFL in Japan (in US$ millions) $45,000 $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 $0 MLB NFL Source: Compiled from Stefan Fatsis, “Major League Baseball Agrees to $275 Million Deal in Japan,” The Wall Street Journal, October 31, 2003, via Factiva, accessed December 2010; and Richard Sandomir, “Japan Trips Mean World to Baseball,” The New York Times, March 2004, via Factiva, accessed December 2010. 10 14 For use only in the course SMU Strategic Management at Nova Scotia Community College taught by Edward McHugh from September 10, 2018 to December 03, 2018. Use outside these parameters is a copyright violation. 711-455 Broadcasting Revenues (in US$ billions) Term Revenue Term Revenue MLB Revenue NFL Term 2008/09–2015/16 2008/09–2015/16 3.5 7 undisclosed undisclosed undisclosed NBA Term 0.12 Revenue 12 Pucks Stick Skates Helmet Gloves Shoulder pads Elbow pads Shin guards Pants Hockey jock Jersey Goaltender's blockers Goaltender's catchers 385 100 100 20 25 60 60 35 45 30 30 35 30 15 Cost 0.12 2009–2011 NHL For use only in the course SMU Strategic Management at Nova Scotia Community College taught by Edward McHugh from September 10, 2018 to December 03, 2018. Use outside these parameters is a copyright violation. Exhibit 3 MEDIA 3 5.4 0.7 0.066 0.65 0.15 2008/09-2015/16 2007–2013 2007–2013 2007–2013 2005–2010 2005–2015 2006–2012 10.5 11.6 8.8 8.8 0.03 0.22 0.35 9.97 BASKETBALL 25 60 85 ICE HOCKEY 2006–2011 2006–2013 2006–2010 2009–2010 2004–2010 2009–2012 29.8 FOOTBALL Ball Sneakers Cost Item 25 100 20 70 40 40 40 30 20 15 15 415 Cost Item Approximate Cost of Equipment for a Varsity High School Sport (in US$) Compiled from Plunkett’s Sports Industry, 2010 Network TV Cable TV Satellite TV Terrestrial Radio Satellite Radio Video Games TOTAL Source: Exhibit 4 BASEBALL 25 70 70 30 30 Ball Helmet Facemask Shoulder pads Girdles Pads Cleats Pants Gloves Jersey Jockstrap Cost Item 12 balls Glove Aluminum bat Helmet Cleats 150 Item Catcher's Kit 225 Compiled by casewriter using data from National Sporting Goods Association, via www.nsga.org, accessed December 2010. Total average per player (excluding catcher/goalie) Source: 711-455 -11- 15 The Globalization of the NFL Exhibit 5 Most Valuable Sports Teams Worldwide, 2010 ($US billions) Rank Team Sport Value 1 2 3 4 5 6 7 8 9 10 Manchester United Dallas Cowboys New York Yankees Washington Redskins New England Patriots Real Madrid New York Giants Arsenal New York Jets Houston Texans Soccer Football Baseball Football Football Soccer Football Soccer Football Football 1.83 1.65 1.6 1.55 1.36 1.32 1.18 1.18 1.17 1.15 Source: Compiled from “The World’s Most Valuable Sports Teams,” Forbes, 2010, via forbes.com, accessed January 2011. 12 16 For use only in the course SMU Strategic Management at Nova Scotia Community College taught by Edward McHugh from September 10, 2018 to December 03, 2018. Use outside these parameters is a copyright violation. 711-455 Exhibit 6a Logo 711-455 Teams in the World League of American Football and Its Incarnations, and Years Active WLAF/NFL Europe/NFL Europa Teams Years Active Raleigh-Durham Skyhawks 1991 Orlando Thunder 1991-1992 Birmingham Fire 1991-1992 San Antonio Riders 1991-1992 New York/New Jersey Knights 1991-1992 Montreal Machine 1991-1992 Sacramento Surge 1991-1992 London/England Monarchs 1991-1998 Barcelona Dragons 1991-2003 Frankfurt Galaxy 1991-2007 Ohio Glory 1992 Scottish Claymores 1995-2004 Amsterdam Admirals 1995-2007 Rhein Fire 1995-2007 Berlin Thunder 1999-2007 Cologne Centurions 2004-2007 Hamburg Sea Devils 2005-2007 Source: Compiled from http://www.worldleagueofamericanfootball.com, accessed July 2011. 13 17 For use only in the course SMU Strategic Management at Nova Scotia Community College taught by Edward McHugh from September 10, 2018 to December 03, 2018. Use outside these parameters is a copyright violation. The Globalization of the NFL Year 25,361 24,216 ── ── 14,562 Average Game Attendance Scottish Claymores def. Frankfurt Galaxy Barcelona Dragons def. Rhein Fire Rhein Fire def. Frankfurt Galaxy Frankfurt Galaxy def. Barcelona Dragons Rhein Fire def. Scottish Claymores Berlin Thunder def. Barcelona Dragons Berlin Thunder def. Rhein Fire Frankfurt Galaxy def. Rhein Fire Berlin Thunder def. Frankfurt Galaxy Amsterdam Admirals def. Berlin Thunder Frankfurt Galaxy def. Amsterdam Admirals London Monarchs def. Barcelona Dragons Sacramento Surge def. Orlando Thunder ── ── Frankfurt Galaxy def. Amsterdam Admirals Frankfurt, Germany Edinburgh, Scotland Barcelona, Spain Frankfurt, Germany Düsseldorf, Germany Frankfurt, Germany Amsterdam, Netherlands Düsseldorf, Germany Glasgow, Scotland Gelsenkirchen, Germany Düsseldorf, Germany Düsseldorf, Germany London, England Montreal, Canada ── ── Amsterdam, Netherlands 48,125 38,982 31,100 47,846 39,643 35,680 32,116 53,109 28,138 35,413 35,134 36,286 61,108 43,789 ── ── 23,847 Attendance 1991 1992 1993 1994 1995 17,206 18,214 16,634 18,161 18,015 18,568 18,052 16,482 15,925 18,965 17,666 Hamburg Sea Devils def. Frankfurt Galaxy Location 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 20,020 World Bowl Result 2007 Average World League Game and World Bowl Attendance For use only in the course SMU Strategic Management at Nova Scotia Community College taught by Edward McHugh from September 10, 2018 to December 03, 2018. Use outside these parameters is a copyright violation. Exhibit 6b World League NFL Europe NFL Europa Source: Compiled from http://www.worldleagueofamericanfootball.com, accessed July 2011. 711-455 -14- 18 711-455 Endnotes 1 Curtis Eichelberger, “Football League Prepares for Global Domination,” The Journal Record, July 14, 1998, via Factiva, accessed November 2010. 2 “Percentage of Foreign-Born Players Dips Slightly,” via www.sportingnews.com, April 2010, accessed December 2010. 3 NHL International Fact Page, www.nhl.com, accessed December 2010. 4 “International Players’ Impact on NBA Grows in Past Two Decades,” VOA, February 17, 2011, via Factiva, accessed May 2011. 5 Stephen Kurczy, “Lakers Parade 2010 After NBA Finals Game 7 with the Biggest Global Audience Ever,” The Christian Science Monitor, June 18, 2010, www.csmonitor.com, accessed December 2010. 6 Eliott McLaughlin, “Super Bowl is King at Home But Struggles on World Stage,” CNN, February 5, 2010, cnn.com, accessed January 2011. 7 Scott Rosner and Kenneth Shropshire, The Business of Sports (Sudbury, MA: Jones & Bartlett, 2004), p. 363. 8 Richard Sandomir, “Japan Trips Mean World to Baseball,” The New York Times, March 16, 2004, via Factiva, accessed December 2010. 9 Skip Wood, “Trouble Ahead for the NFL?” USA Today, September 13, 2010, via Factiva, accessed January 2011. 10 Jimmy Smith, “Wrestling with Revenue,” Times-Picayune, December 26, 2010, via Factiva, accessed January 2011. 11 Jimmy Smith, “Wrestling with Revenue,” Times-Picayune. 12 “Inside Cowboys Stadium,” New York Daily News, September 20, 2009, via Factiva, accessed January 2011. 13 “Inside Cowboys Stadium,” New York Daily News. 14 Michael Fitzpatrick, “MLB: Opening Day in Japan is Good for Baseball,” March 25, 2008, via bleacherreport.com, accessed June 2011. 15 Jenn Abelson, “NBA Woos a World Audience,” The Boston Globe, June 10, 2010, via www.boston.com, accessed November 2010. 16 Global consumer product licensing business for United States-based sports leagues done outside the United States by league in percentages for 2006: “Worldwide licensed product sales rose less than 1% to $108.9 billion; growth mainly from emerging economies,” TLL The Licensing Letter, 31 (5): 1, March 05, 2007. ISSN: 8755-6235, via Tablebase, accessed December 2010. 17 Marie Leone, “NFL Runs Up the Score,” CFO.com, January 30, 2008, via Factiva, accessed January 2011. 18 Patrik Jonsson, “Baseball: What’s New This Year?” The Christian Science Monitor, April 3, 2010, via Factiva, accessed January 2011. 19 Jimmy Smith, “NFL’s 75th Anniversary,” Times-Picayune, September 2, 1994, via Factiva, accessed January 2011. 20 Marie Leone, “NFL Runs Up the Score,” CFO.com, January 30, 2008, via Factiva, accessed January 2011. 21 Tom Van Riper, “The Highest-Paid NFL Coaches,” Forbes, January 2011, via forbes.com, accessed June 2011. 15 19 For use only in the course SMU Strategic Management at Nova Scotia Community College taught by Edward McHugh from September 10, 2018 to December 03, 2018. Use outside these parameters is a copyright violation. The Globalization of the NFL The Globalization of the NFL 22 Alan Schwarz and Brad Lefton, “Japanese Pitcher Provokes Tension with the U.S.,” The New York Times, November 19, 2008, accessed June 2011. 23 Vanessa Zimmer, “Dragging Their Devotion,” Northwestern University Journal of International Human Rights, December 2005, http://www.law.northwestern.edu/journals/jihr/v4/n2/6/#30, accessed June 2011. 24 Pete Toms, “Rule IV Draft: What is the Future of MLB Player Development?” November 16, 2008, via www.bizofbaseball.com, accessed June 2011. 25 “Survey: Most Super Bowl Viewers Tune in for the Commercials,” Nielsenwire, January 20, 2010, via blog.nielsen.com, accessed January 2011. 26 “Super Bowl Ad Prices Dip, But Still Pricey,” CBS News, January 20, 2010, http://www.cbsnews.com/ 2100-500290_162-6082591.html, accessed October 2012. 27 Mark Kurlansky, “Cuba’s Major-League Cachet,” The Wall Street Journal, April 10, 2010, via Factiva, accessed January 2011. 28 “History of baseball in Japan,” Baseball-reference.com, http://www.baseballreference.com/bullpen/ History_of_baseball_in_Japan, accessed January 2011. 29 Junya Ishii, “The History of the Baseball Partnership Across the Pacific Ocean,” Embassy of Japan, March 2004, via http://www.us.emb-japan.go.jp/english/html/embassy/otherstaff_ishii0314.htm, accessed January 2011. 30 Mark Kurlansky, “Cuba’s Major-League Cachet,” The Wall Street Journal, April 10, 2010, via Factiva, accessed January 2011. 31 www.mlb.com, accessed January 2011. 32 Nick Williams, “Priority on Global Outreach Expands NBA’s Appeal,” Tampa Tribune, June 10, 2009, via Factiva, accessed November 2010. 33 “The Global Quest for a Sports Fan for All Seasons,” Financial Times, October 26, 2010, via Factiva, accessed November 2010. 34 Jon Wertheim, “The Whole World Is Watching,” Sports Illustrated, June 14, 2004, via Business Source Complete, accessed April 2008. 35 Jon Wertheim, “The Whole World Is Watching.” 36 Jenn Abelson, “NBA Woos a World Audience,” The Boston Globe, June 10, 2010, via www.boston.com, accessed November 2010. 37 Alan M. Klein, Growing the Game: The Globalization of Major League Baseball (Binghamton: Vail-Ballou Press, 2006), p. 190. 38 Jenn Abelson, “NBA Woos a World Audience.” 39 Keith Reed, “Globallization,” Boston Globe, October 28, 2007. 40 Scott Burnside, “The NHL’s Melting Pot is Changing,” ESPN, September 30, 2010, via http://sports.espn. go.com, accessed January 2011. 41 William Houston, “European Expansion on the Horizon,” The Globe and Mail, September 2008, via Factiva, accessed January 2011. 42 Grant Wahl, “Football vs. Futbol,” Sports Illustrated, July 5, 2004, via Business Source Complete, accessed April 2008. 16 20 For use only in the course SMU Strategic Management at Nova Scotia Community College taught by Edward McHugh from September 10, 2018 to December 03, 2018. Use outside these parameters is a copyright violation. 711-455 711-455 43 Judy Battista, “N.F.L. Looks to Increase Its Foreign Presence,” The New York Times, October 13, 2006, via Factiva, accessed April 2008; Grant Wahl, “Football vs. Futbol,” Sports Illustrated, July 5, 2004, via Business Source Complete, accessed April 2008. 44 Len Pasquarelli, “NFL Europa Failed to Produce Players, Profits,” ESPN, June 29, 2007, via espn.com, accessed June 2011. 45 Len Pasquarelli, “NFL Europa Failed to Produce Players, Profits.” 46 A. Craig Copetas, “Tackling Problems: U.S. Football Finds it Difficult to Score Points with Europeans,” The Wall Street Journal Europe, February 11, 1997, via Factiva, accessed November 2010. 47 George Vecsey, “NFL Tries to Turn Globalization into a Team Sport,” Sports of The Times, October 26, 2007, via Factiva, accessed April 2008. 48 “A Special Report on the Business of Sport: Local Heroes,” The Economist Intelligence Unit, August 19, 2008, via Factiva, accessed November 2010. 49 “A Special Report on the Business of Sport: Local Heroes,” The Economist Intelligence Unit. 50 Christopher Clarey, “NFL Tried to Woo Europe One Player at a Time,” The New York Times, 2006, via nytimes.com, accessed December 2010. 51 Christopher Clarey, “NFL Tried to Woo Europe One Player at a Time.” 52 Christopher Clarey, “NFL Tried to Woo Europe One Player at a Time.” 53 Richard Sandomir, “N.F.L. Pulls the Plug on Its League in Europe,” The New York Times, June 30, 2007, via ABI/ProQuest, accessed April 2008. 54 Alex Altman, “NFL Brings a Different Football to Europe,” Time, October 29, 2007, via time.com, accessed January 2011. 55 Keith Reed, “Globallization.” 56 Ross Biddiscombe, “A Top-Down Strategy,” SportBusiness International, October 2007, via ABI/ProQuest, accessed April 2008. 57 Billy Kenber, “Ambitious NFL Looks to Make Permanent Touchdown in UK,” The Times, October 25, 2010, via Factiva, accessed November 2010. 58 Mattias Karen for AP, “London Calling: NFL League Aims to Boost International Fan Base with Sunday’s 49ers-Broncos Game,” Waterloo Region Record, October 30, 2010, via Factiva, accessed November 2010. 59 “A Special Report on the Business of Sport: Local Heroes,” The Economist Intelligence Unit, August 19, 2008, via Factiva, accessed November 2010. 17 21 For use only in the course SMU Strategic Management at Nova Scotia Community College taught by Edward McHugh from September 10, 2018 to December 03, 2018. Use outside these parameters is a copyright violation. The Globalization of the NFL S w 9B06M088 YUNNAN BAIYAO: TRADITIONAL MEDICINE MEETS PRODUCT / MARKET DIVERSIFICATION George Z. Peng wrote this case under the supervision of Professor Paul Beamish solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Richard Ivey School of Business Foundation prohibits any form of reproduction, storage or transmission without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Richard Ivey School of Business Foundation, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail cases@ivey.uwo.ca. Copyright © 2006, Richard Ivey School of Business Foundation Version: 2011-09-21 In 2003, following an introduction through the State Food and Drug Administration of China, 3M Company, a major U.S. multinational corporation, initiated contact with Yunnan Baiyao Group Co., Ltd. (YB) to discuss potential cooperative opportunities in the area of transdermal pharmaceutical products. YB, the namesake of one of its main products, Yunnan Baiyao, was a household brand in China for its unique traditional herbal medicines that were effective in the treatment of open wounds, fractures, contusions and strains. (Hereafter, we refer to the group company as YB and the product as Baiyao.) In recent years, the company had been engaged in a series of corporate reforms and product / market diversification strategies to respond to the sea of change in the Chinese pharmaceutical industry and competition at a global level. By 2003, YB was already a vertically-integrated, product-diversified group company with an ambition to become an international player. The proposed cooperation with 3M was an attractive option to YB: It was not only an opportunity for domestic product diversification, but also an opportunity for international diversification. YB had been attempting to internationalize its products for some time: An overseas department had been established in 2002 specifically for this purpose. On the other hand, YB had also been considering another option for some time, namely, whether to extend its brand to toothpaste and other healthcare products. YB had to decide which of the two options to pursue and whether it would be feasible to pursue both. THE HISTORY OF YUNNAN BAIYAO: 1902–19981 Stage 1: 1902–1955 (Qu Huanzhang Panacea Period) In 1902, Baiyao, originally know as Qu Huanzhang Panacea, was formulated from various natural herbs by Qu Huanzhang, a highly respected practitioner of Chinese medicine. However, he did not develop the medicine solely on his own. Some stories say that he benefitted from the Yi, Hani and Yao ethnic minority 1 Please refer to Exhibit 1, Yunnan Baiyao Timeline. 23 For use only in the course SMU Strategic Management at Nova Scotia Community College taught by Edward McHugh from September 10, 2018 to December 03, 2018. Use outside these parameters is a copyright violation. 3. 9B06M088 medicine in Yunnan Province, while others say that he may have developed his herbal formula based on the traditional medicines used by the trading caravans that travelled on the Tea and Horse Caravan Road (known in Chinese as Chamadao), an ancient trade route that connected Southwest China and India and functioned as the so-called Silk Road of Southwest China. Baiyao was destined, to a certain degree, to be formulated in Yunnan Province, a mountainous area characterized by high and dangerous terrain. In bygone eras, it had been routine for local people to suffer injuries, fractures, contusions and strains from work or travel. Local people looked for ways to cure injuries, and herbal medicine was the usual solution. In addition, Yunnan Province was famous for its herbal diversity: 6,500 out of the 11,000 medicinal herbs in China were grown there, and many were unique to Yunnan Province. The combination of the need for medicine and the herbal diversity resulted in a higher likelihood of the formulation of herbal medicines in Yunnan Province. When Baiyao was first formulated, it was known as Qu Huanzhang Panacea. The name Baiyao translates as “white powder,” referring to the original form of the product. Because of its effectiveness in the treatment of open wounds, muscular strains, bruising and arthritis and its ability to invigorate blood circulation, this formulation gained rapid fame. It became a household name, initially in Yunnan Province and then throughout the rest of China. In 1916, the Chinese Nationalist government allowed the public sale of the product. By the 1930s, it could be found, in its powder form, on the shelves of many Chinese homes. In 1937, Qu, the creator of the formulation, donated 30,000 bottles of Baiyao to the Chinese army, which was fighting the Japanese in the Second Sino-Japanese War. The medical power of Baiyao was further spread through word of mouth of the soldiers. The product proved so effective that from that time on, it became part of the first-aid kit of the Chinese armed forces. The formula and manufacturing process of Baiyao had been kept secret since its formulation in 1902. Because of his refusal to reveal the formula of Baiyao, Qu was imprisoned and tortured by the then-ruling party, the Chinese Nationalist government. Before his death in captivity in 1938, at the age of 58, he secretly passed the details of the formula and manufacturing process over to his wife, Miao Lanying. In order to guard the formula, she closed down their shops and ceased the production of Baiyao. On the fall of the Chinese Nationalist government in 1949, the new government led by the Chinese Communist Party assisted Miao Lanying in re-establishing the business. She was so grateful for this assistance that, on her death in 1955, she left the formula and manufacturing process to the government. Stage 2: 1956–1992 (Baiyao Period) After Miao Lanying transferred the formula and manufacturing process to the government in 1955, the production of Baiyao was started by Kunming Pharmaceutical Factory under the original name of Qu Huanzhang Panacea. One year later, the name was changed to Baiyao, and the formula and the manufacturing process were listed as a top national secret and placed under national protection. At that time, Baiyao was of military importance due to the adverse international environment China was facing. Baiyao was so highly guarded and regarded by the central government that, in 1970, premier Zhou En-lai himself gave instructions that efforts should be made “to construct a specialized pharmaceutical factory to expand the production; to establish research institutes to deepen the research into Baiyao; and to establish a herb-planting base for Baiyao.” 24 For use only in the course SMU Strategic Management at Nova Scotia Community College taught by Edward McHugh from September 10, 2018 to December 03, 2018. Use outside these parameters is a copyright violation. Page 2 9B06M088 Subsequently, in 1971, Yunnan Baiyao Pharmaceutical Factory, the predecessor of the current YB, was established on the foundation of the fifth workshop of Kunming Pharmaceutical Factory. Since then, Baiyao had seen rapid development in its mass production, research and application. Yunnan Baiyao Pharmaceutical Factory carried out a series of product development and product diversification moves. Various forms of Baiyao and related products were developed and mass produced:     1975: Baiyao Capsule (for internal use) 1984: Baiyao Plaster and Baiyao Tincture 1985: Gong Xue Ning Capsule (for vaginal bleeding) 1992: Baiyao Aerosol In the meantime, the active ingredients of Baiyao and its source herbs had been identified, and their pharmacologic activity had been determined. This stage also saw the use of Baiyao in the treatment of a wider spectrum of diseases. Baiyao moved from being an herbal medicine with narrow usage in caring for wounds and injuries to a wide-spectrum medical product line. Baiyao products were widely used in caring for more than 300 applications in areas such as internal medicine, gynecology, pediatrics and dermatology. Stage 3: 1993–1998 In 1993, Yunnan Baiyao Pharmaceutical Factory was reformed toward a modern enterprise system through the establishment of Yunnan Baiyao Limited Co., which was listed on the Shenzhen Securities Exchange through a successful A-share initial public offering (IPO). This public listing not only brought in much needed funds for technological upgrading, but it also standardized operations and management practices, which were prerequisites for a public company. Despite efforts to modernize Yunnan Baiyao Pharmaceutical Factory, problems hindered its development. One of the most serious problems was the lack of unified branding. Because of historical reasons, Baiyao was also produced by three other companies in Wenshan, Dali and Lijiang under different trademarks. As a result, there was a vicious price competition that weakened the brand reputation of Baiyao as a whole. Companies sacrificed product quality to lower costs and gain market share, resulting in over-production and predatory use of wild herbal resources. To strengthen the brand reputation of Baiyao, Yunnan Baiyao Limited Co. and the other three producers were integrated into Yunnan Baiyao Group Co. (YB) through joint shareholding in 1996. Through what was referred to as the five U’s — unified production planning, unified permit number, unified trademark, unified quality standards and unified sales management — YB became the sole producer of Baiyao and the sole proprietor of intellectual property related to Baiyao. Production was reduced from 50 million vials/packages to 20 million vials/packages, alleviating the pressure on the wild herbal resources. The acquisition of the other three companies also served a product diversification purpose, because all of the other three companies also marketed a series of other products. The unified sales management approach also enhanced product standardization and market concentration, transforming the original price competition into a competition based on quality, brand and service. As a result, the brand image and market price of Baiyao recovered quickly. YB subsequently raised the prices of Baiyao products several times to position them as quality products. The five U’s also effectively curbed the counterfeiting of Baiyao, and the interest of customers was better protected. 25 For use only in the course SMU Strategic Management at Nova Scotia Community College taught by Edward McHugh from September 10, 2018 to December 03, 2018. Use outside these parameters is a copyright violation. Page 3 9B06M088 During this period, YB took the first step in its corporate strategy by adopting both a modern enterprise system and a unified management of production and branding. The integration of the companies also diversified YB’s products. This stage laid the foundation for the subsequent corporate strategies in product and market dimensions. It should be noted that even though YB was trying to reform toward a modern enterprise system and move toward a market-oriented economy, the strategic moves made during this period were basically directed by the government. It was the government that pushed for the integration of the Baiyao-producing companies and the production of Baiyao by a single company. Without government support, YB could not have repeatedly raised the prices of Baiyao products amid generally declining drug prices as a result of intensified competition and China’s rapid transition toward a market economy. THE REFORM, RESTRUCTURING AND DIVERSIFICATION OF YUNNAN BAIYAO: 1999–2003 Year 1999 (Share Diversification, Vertical Integration and Product Diversification) In 1999, the Chinese pharmaceutical industry entered an era of drastic transition. The requirements of Good Manufacturing Practices (GMP) and Good Supply Practices (GSP) certification resulted in further industry concentration. Several diversified and vertically-integrated pharmaceutical companies had appeared, reshaping the industry landscape. Firms faced the fact that they needed to either grow bigger through integration and diversification or they would be eliminated through competition. Regardless of Baiyao’s reputation and various efforts made in the past to move YB toward a marketoriented economy, by 1999, YB was still basically a state-owned company. Its resources were mainly allocated to production, and its sales department consisted of only a dozen staff members waiting for customers to come. YB could not respond to the rapidly changing market situation. As a consequence, revenue in 1998 dropped RMB8 million compared with the previous year. In 1999, the chief executive officer (CEO) of YB was replaced by Wang Minghui. Under Wang’s leadership, YB underwent a series of reforms, restructurings and strategic moves toward product and market diversification. In 1999, Hongta Group became YB’s second-largest shareholder, and as a result, YB diversified its share structure. YB also acquired Yunnan Pharmaceutical Trading Co. and Tian Zi Hong Pharmaceutical Co. Through the distribution channels of the former, YB achieved forward vertical integration into distribution, while through the latter, YB diversified its offerings into the production of decocted (concentrated) pieces. These simultaneous activities moved YB in the direction of becoming a diversified and vertically-integrated player in the Chinese pharmaceutical industry. In the same year, YB established its e-Commerce Co. Ltd. to build its nation-wide sales network. Previously, YB had a negligible sales force and its resources were mainly allocated to production, like many other state-owned companies. Because Wang had a background in sales, he saw the importance of a sales network during a time when China was moving toward a market economy. YB used the e-Commerce Co. Ltd. as a platform on which to build its sales offices across the country. The e-Commerce Co. Ltd. also served as a platform for internal entrepreneurship: YB regarded the 800-plus salespersons as internal entrepreneurs who used YB’s e-commerce platform to set up sales offices. These salespersons were hired based on competition and were motivated to compete with each other through a benchmarked incentive plan on a yearly basis. With the establishment of a sales network, YB allocated more resources to marketing, which played a decisive role in YB’s competition with other pharmaceutical companies. 26 For use only in the course SMU Strategic Management at Nova Scotia Community College taught by Edward McHugh from September 10, 2018 to December 03, 2018. Use outside these parameters is a copyright violation. Page 4 9B06M088 Year 2000 (Research & Development Reforms) In 2000, YB also made efforts to build its research and development (R&D) system, based on the belief that a competitive enterprise must have strong R&D capabilities. In September, YB established a Medicinal Herb Research Institute (MHRI) by integrating its three originally independent R&D entities: the National Postdoctoral Research Station, the Technology Center and the Research Institute. The integration of the originally dispersed units pooled their resources and laid the foundation for future R&D to exploit synergy and scale. With the establishment of MHRI, YB also adopted new systems of R&D operation, including the Chief Scientist System and the R&D Cooperative System. The Chief Scientist System motivated scientists by linking their income to their scientific output. A series of awards was set up for the purpose of motivating scientists and spurring their creativity, including the stage output award, the subproject award, the risk reduction award for timely termination of unfruitful projects, the cost reduction award, the project early / on-time delivery award, and so on. Chief scientists and their team members who made significant R&D contribution would be given a substantial reward. Through the R&D Cooperative System, YB in fact established a society-wide and open R&D system, maximally using society-wide resources and successfully implementing a “brain-borrowing” strategy. YB cooperated with a number of universities and research institutes in a series of cooperative agreements. A number of national experts were hired by YB to serve as chief scientists. Through new methods of R&D operation, YB solved more than 20 technical problems and developed a series of new products. Year 2001 (Organizational Restructuring and Management Reform) On the foundation of achievements made in 1999 and 2000 in marketing and R&D reform, YB forged ahead to carry out fundamental organizational restructuring in 2001. First, YB streamlined its structure by reducing the number of departments. Functional departments with overlapping functions were either eliminated or merged, and administrative departments were reduced. In all, the number of departments was reduced from 17 to 12, resulting in higher functional and administrative efficiency. Secondly, YB underwent drastic management reform by adopting a compensation point system, an Enterprise Resource Planning (ERP) system and a production order system. Through cooperation with Tsinghua University, YB clarified 158 jobs by assigning compensation points for each job position, based on detailed job descriptions. YB broke away from the traditional egalitarian compensation system and made a transition towards skills-based and contribution-based compensation systems. YB also established eight cost centres and implemented an ERP system to carry out cost and benefit accounting for these cost centres. The ERP system was also linked to the compensation point system to serve the purpose of employee compensation accounting. The adoption of ERP and the compensation point system greatly motivated employees on a fair basis. Traditionally, YB had been focused on production and lacked cost and market competition awareness. As a result, the production was not oriented toward market demand, which greatly affected YB’s core competence and competitiveness, resulting in high costs, low product quality and low levels of flexibility and agility in production. To change this passive situation, YB decided to adopt a production order system. Through this system, the production became demand-oriented, resulting in better use of resources, cost reduction and production flexibility. The production order system was subsequently introduced in YB in 2003. 27 For use only in the course SMU Strategic Management at Nova Scotia Community College taught by Edward McHugh from September 10, 2018 to December 03, 2018. Use outside these parameters is a copyright violation. Page 5 9B06M088 In 2001, YB also established Shanghai Yunnan Baiyao Transdermal Technology Ltd. to develop the market for Baiyao Bandage and Baiyao Plaster. In June 2001, Baiyao Bandage appeared on the market and was an immediate success. In this year, YB also made another product diversification move by bringing to market a hemorrhoid ointment. YB succeeded again in extending its brand by leveraging its brand reputation. Year 2002 (100-Year Anniversary and a New Strategy) The year 2002 was significant for YB. Not only was it YB’s 100-year anniversary, it was also the first year since China had been accepted as a member of the World Trade Organization (WTO). The end of 100 years was a convenient moment to take stock. Looking back, the leadership felt that the progress YB had made was remarkable, and the progress made in the last three years since the current leadership took office had occurred in leaps and bounds. The combination of a rapidly changing market situation and the mission falling upon YB leadership to carry the firm into a new century called for new strategies. However, YB was facing some problems. The first was how to respond to the significant changes in the Chinese pharmaceutical industry. The reform of the Chinese pharmaceutical industry and China’s accession to the WTO brought about drastic changes in the competitive landscape. YB had been essentially a producer of a medicine for the treatment of minor injuries. It would become a minor niche player if it did not follow a diversification and integration strategy. With the opening up of the Chinese market to world competition, YB either had to become a global brand or it would fade out from competition. Even though YB had pursued bold corporate strategies in the past decade, more needed to be done to keep up with global competition. Secondly, many of YB’s products had reached or were reaching maturity. To grow this traditional medicine firm, YB had to look for new growth areas; diversification of its products and markets and vertical integration could help YB extend its life cycle and stabilize its profits. To respond to these challenges, YB established a series of strategies titled “one core and four growth areas.” The “one core” referred the headquarters of YB, its group companies (the other three productionoriented companies acquired in 1996) and its sales network, which was basically what YB had in 2002. The four growth areas — the industrialization of herbal resources, the industrialization of research and development, vertical integration and internationalization — are described below. Growth Area 1: The Industrialization of Herbal Resources The market for herbs and decocting pieces had been growing at an annual rate of 20 per cent, both for the domestic market and the export market. Yunnan Province was one of the main sources of herbs with its more than 6,500 species. However, the potential of rich herbal resources was not exploited in a managed way. There was no quality assurance system in place. Herbal resource products originating from Yunnan Province lacked not only bioactivity fingerprint standards, which ensured consistency in the identification, chemical separation and quality monitoring of the characteristic chemical substances of the herbs, but also branding and product quantity control. This lack of standards and quality control greatly affected the profitability of these herbal resources. YB believed that it could benefit from Yunnan’s rich herbal resources by industrializing the herbal resources. To achieve this goal, YB decided to set up an herb-planting base and establish a quality 28 For use only in the course SMU Strategic Management at Nova Scotia Community College taught by Edward McHugh from September 10, 2018 to December 03, 2018. Use outside these parameters is a copyright violation. Page 6 9B06M088 assurance system and bioactivity fingerprint standards. The herb-planting base could be used as a platform upon which herbal resources could be industrialized based on established quality systems and fingerprint standards. Herbs would be purchased from farmers through a system of purchase orders. YB could help farmers plant herbs in quantity according to the established quality standards. YB would then use its brand and sales network to market the herbal resources, ensuring consistent quality, controlled quantity and compliance with the fingerprint standards. Growth Area 2: The Industrialization of Research and Development The development of new medicines had become the rule of the game in the international pharmaceutical industry. In addition, the transfer of intellectual property rights and new medicine certificates was more profitable than producing and selling pharmaceutical products themselves. For example, the annual net profit of the National Institute of Health (NIH), a U.S. medical research institute, was approximately US$12 billion. YB aspired to become a big player in pharmaceutical research by adopting similar approaches to those of NIH. These approaches included research contracts, grants and findings. YB’s research institute could serve as a platform for industrializing R&D. YB had already become a target of those who had herbal know-how for potential cooperation and knowledge transfer. By leveraging its reputation into research, YB believed that further growth could be expected. Growth Area 3: Vertical Integration into Distribution through the Operation of Chain Stores With competition intensifying as a result of the drastic changes in the Chinese pharmaceutical industry, many companies diversified into distribution. Even though YB had made similar moves by acquiring Yunnan Pharmaceutical Trading Co. in the past, the distribution channels so obtained were not finegrained and extensive. YB felt the need to strengthen its foothold in Yunnan Province by establishing Baiyao Da Yao Fang (a drugstore chain) to cover the whole province. Growth Area 4: Internationalization Even though Baiyao was well-known in China and in Singapore, Malaysia, Thailand and Vietnam, where there were visible overseas Chinese communities, Baiyao was not known to customers in other countries, especially those in the two biggest markets, the European Union (EU) and North America. To ultimately become a world player, YB had to internationalize its products. Therefore, YB saw internationalization as another growth area. Once its strategies had been determined, YB was aggressive in pursuing them. In 2002, the Wuding Traditional Chinese Herb-Planting Base was set up for the planting and domestication of wild herbs. The planting base later obtained a Good Agricultural Practices (GAP) certificate. On the foundation of the Wuding base, the industrialization process of wild herbal resources was sped up. Under the auspices of state funding, two companies, Traditional Chinese Herbal Seed Breeding Company and Yunnan Baiyao State Key Laboratory, were established that attracted a group of top scientists, and were key in the construction of a planting base that met the Good Laboratory Practice (GLP) standards. YB hoped that through quality assurance it could offer the domestic and international markets safe, reliable and consistent 29 For use only in the course SMU Strategic Management at Nova Scotia Community College taught by Edward McHugh from September 10, 2018 to December 03, 2018. Use outside these parameters is a copyright violation. Page 7 9B06M088 herbal products, thus laying the foundation for the modernization and internationalization of traditional Chinese herbal medicine. Even though the Wuding planting base was set up to industrialize herbal resources, there was another reason for YB to backward integrate into herbal planting. Throughout the past couple of decades, the herbs from which Baiyao was produced had been exploited without regulation. Some herbal medicine species were very rare, and due to increasing demand in alternative treatment, they were getting closer to extinction. Because of over-exploitation, it became questionable whether the supply of herbal sources could keep pace with YB’s growth. To a certain degree, YB’s move in this direction was a necessity. The backward integration was also motivated by the associative branding effect for YB because the herbal resources produced through the planting base would be exported using the YB brand name. YB hoped that through the export of good quality herbs it could build its reputation overseas for its pharmaceutical products. Also in 2002, Baiyao Da Yao Fang Ltd. (a drugstore chain) was established, and it had since been making smooth progress. YB also integrated the operations of the drugstore chain and Yunnan Pharmaceutical Trading Co. because the two subsidiaries shared the same goal of forward vertical integration and had many synergies. The moves YB made in 2002 were all strategic in nature. Both the Wuding Planting Base and the Baiyao Da Yao Fang drug chain were long-term investments because they would not contribute to YB’s profit within the first five years after their establishment. In summary, during the 1999 to 2002 period, YB had been pursuing systematic reform, restructuring, vertical integration and diversification strategies to modernize the state-owned enterprise. This period coincided with the assumption of office by Wang Minghui. With these strategic moves, YB had been seeing dramatic improvement in its performance (see Exhibits 2, 3 and 4). THE OPTION OF MARKET AND PRODUCT DIVERSIFICATION: THE 3M PROPOSAL Consistent with the “one core and four growth areas” strategy, YB had been exploring the possibilities of overseas markets. In 2002, the Yunnan Baiyao Overseas Department was set up to develop international markets. The goal of the department was to solidify Yunnan Baiyao’s markets in Southeast Asia and to develop markets in the United States, the European Union and Japan. YB wasted no time in its internationalization strategy. In 2003, YB registered and received approval from Vietnam and Thailand authorities to market its products. YB adopted the path of least resistance by first exploring geographic regions of low cultural distance and low entry barriers. The company was deliberating about how to enter the United States, the European Union and Japan, and at this juncture, 3M proposed to cooperate with YB in the area of transdermal products. YB had to decide whether to pursue this opportunity. 3M Company 3M Company (NYSE: MMM; formerly Minnesota Mining and Manufacturing Company until 2002) was founded at Two Harbors, Minnesota, in 1902. The company had since become a gigantic multinational 30 For use only in the course SMU Strategic Management at Nova Scotia Community College taught by Edward McHugh from September 10, 2018 to December 03, 2018. Use outside these parameters is a copyright violation. Page 8 9B06M088 enterprise with a worldwide presence. By 2003, 3M was one of the 30 companies included in the Dow Jones Industrial Average, and was ranked number 110 on the 2003 Fortune 500 listing. The company had 132 plants and more than 67,000 employees around the world, with sales offices in more than 200 countries. Out of 3M’s more than a dozen core competencies, adhesives was one of its major successes. Over the years, 3M had leveraged its competencies in adhesives technologies to many industries, including health care, automotive, construction and telecommunications. In health care, 3M’s adhesive technology was mainly used in transdermal drug delivery systems. 3M’s Drug Delivery Systems Division was a global leader in transdermal drug delivery with a 30-year proven track record, and more than 80 per cent of the transdermal drug delivery products in the United States contained a 3M transdermal component. The Drug Delivery Systems Division utilized nearly 50 per cent of the 3M corporate core technologies to meet customer needs. Transdermal products developed and manufactured by 3M were registered in more than 60 countries. 3M’s technology in transdermal delivery systems offered many advantages over other products: They were breathable adhesives, offered pain-free removability and were waterproof. 3M solutions to transdermal delivery were also hypo-allergenic, thus reducing skin irritation. 3M’s transdermal technologies could be utilized by pharmaceutical and biotech companies by forming partnerships with 3M. 3M Drug Delivery Systems’ technology, product development, global regulatory expertise and commercial manufacturing provided pharmaceutical and biotech companies with differentiated products, speed to market and increased probability of technical and commercial success. For example, 3M had been involved in the development and manufacturing of the following products:     Minitran™ ([nitroglycerin] transdermal delivery system)2 Climara® (estradiol transdermal system)3 ClimaraPro® (estradiol transdermal system)4 Menostar® (estradiol-levonorgestrel transdermal system)5 YB’s Experiments with Transdermal Products The History of Chinese Traditional Transdermal Products Transdermal drug delivery through a plaster (or plaster bandage) was an important branch of traditional Chinese medicine. The Chinese term for plaster, Bo Tie, appeared in the year 682 for the first time, in Sun Si-Miao’s Thousand Golden Prescriptions, an important medical book containing the main medical achievements before the Tang dynasty [618–907AD]. In later dynasties, the application of plasters was further developed and perfected with the development of acupuncture and moxibustion (a therapy using moxa, or mugwort herb). According to Chinese medical theory, plasters were applied on acupoints for better curative effect. There were many plaster recipes collected in the famous Ming Dynasty book Compendium of Materia Medica (or Great Pharmacopoeia), compiled by Li Shi-Zhen in 1578. 2 Minitran™ is a trademark of 3M Company. Climara® is a registered trademark of Schering AG. 4 Climara Pro® is a registered trademark of Schering AG. 5 Menostar® is a registered trademark of Berlex Laboratories. 3 31 For use only in the course SMU Strategic Management at Nova Scotia Community College taught by Edward McHugh from September 10, 2018 to December 03, 2018. Use outside these parameters is a copyright violation. Page 9 9B06M088 The application of plasters culminated in the Qing Dynasty with the publication of Li Yue Pian Wen in 1864. Written by Wu Shi-Ji, this book focused on the cutaneous and external applications of various plasters. Wu Shi-Ji, regarded as the master of plasters, used plaster as the main method of drug delivery for most diseases and achieved significant curative effects on patients. Many Chinese doctors learned from his masterpiece on plasters and spread the use of plasters across China. As a result, plasters were a well accepted form of medicine in China. In an online survey, 99 per cent of respondents answered that they had used plasters before. However, due to the disadvantages of traditional rubber adhesive plasters, and the inroads of Western medicine, Chinese plaster medicine had been under pressure and many thought plasters were a so-called sunset form of treatment. Plasters occupied a very small share in the Chinese pharmaceutical market, and market competition of plaster products was not intense. Within the small market share of plasters in the whole pharmaceutical industry, the share occupied by Baiyao plasters was almost negligible. However, plasters, as a medium of transdermal drug delivery, were still an attractive alternative drug delivery method. Compared to oral medication and hypodermal injection, transdermal drug delivery had the advantage of direct application to the afflicted areas, thus avoiding both the degradation of medicine in the digestive tract and toxic effects on the liver. The apprehensions people held about plasters were largely caused by non-medicinal components, such as skin allergies to the adhesives, the adhesive’s lack of breathability, the pain associated with removing the adhesive from the skin and the failure of the adhesives when they became wet. If these disadvantages could be overcome with technological advances, more and more people would embrace plasters. An online survey showed that 95 per cent of respondents thought that plasters had huge market potential. YB’s History in Transdermal Products YB’s interest in diversifying into transdermal products dated back to 1997, when a product called Baiyao Bandage (a product similar to Band-Aid) was developed in the laboratory. Seeing the great market potential of transdermal products, Shanghai Yunnan Baiyao Transdermal Technology Ltd. was consequently established in 2001, charged with the market development for Baiyao Bandage and Baiyao Plaster. In the beginning, the company adopted the concept of a virtual firm, with only an investment of RMB5 million and three persons from Yunnan Baiyao: one responsible for general management, one responsible for sales and the third responsible for technology. Prior to Baiyao Bandage, the Chinese bandage market had been monopolized by Johnson & Johnson. To compete with such a strong competitor, speed and strategy were needed. If Yunnan Baiyao had adopted its traditional way of doing business by sequentially acquiring land, constructing production workshops and purchasing production facilities, it would have taken at least two years for Baiyao Bandage to go to market. By outsourcing the production of Baiyao Bandage to a French firm, YB was able to not only bring Baiyao Bandage to market within only three months but also to concentrate on brand and market development. In June 2001, Baiyao Bandage appeared in the market and was an immediate success. In June alone, YB achieved sales of RMB4 million and a profit of RMB1.88 million. From June to December, YB realized sales revenue of RMB30 million. In only a short time, Baiyao Bandage became the most formidable competitor of Band-Aid. This accomplishment was attained not only because YB had adopted a strategy of using second-grade cities to encircle first-grade cities to avoid direct market competition but more importantly because YB had a deep grassroots brand image. In addition, Baiyao Bandage came in two forms, one without medicinal contents sold in supermarkets to compete with Johnson & Johnson, and the 32 For use only in the course SMU Strategic Management at Nova Scotia Community College taught by Edward McHugh from September 10, 2018 to December 03, 2018. Use outside these parameters is a copyright violation. Page 10 9B06M088 other with medicinal contents sold in pharmacies. Compared to Band-Aid, Baiyao Bandage with medicinal contents could not only cover the wounds but also had antiphlogistic (inflammation-reducing) and haemostatic (blood-stopping) effects. The Potential of the 3M Proposal The Potential for Product Diversification The cooperative opportunity with 3M could potentially be an effective way of diversifying YB’s product line into the transdermal market. 3M had numerous transdermal solutions that could overcome customer concerns in terms of the adhesive’s breathability, removability, skin irritation and waterproofness. By solving these problems, YB could better serve customers and increase its market share. The potential cooperation with 3M also had several advantages. First, if YB decided to use 3M transdermal drug delivery systems to deliver its Baiyao medicinal contents, the cooperation would improve the likelihood of success because the proposed products were proven from both sides. Secondly, YB would enjoy speed to market with low R&D costs. Because the 3M contents were proven products, only minimal R&D would be necessary to tailor 3M’s product to YB’s medicinal contents. R&D would cost much less and consume less time, resulting in higher speed to market. In addition, most of the R&D was to be carried out by 3M because it had the core competence. 3M would carry out the prefeasibility assessment, the feasibility study, the product development and the commercialization with input from YB. The Potential for Internationalization The cooperation with 3M offered not only an opportunity for product diversification but also an opportunity for YB to diversify its markets. 3M’s transdermal products were widely registered, and 3M had global regulatory expertise. 3M’s global presence and expertise would serve as a platform for YB to internationalize its products, beginning with its transdermal products. 3M had shown interest in helping YB to gain access to the U.S. market using its reputation. This opportunity was just what YB had been looking for. It was very difficult for a traditional herbal medicine to enter a market like the United States because of the regulatory barriers. Through 3M’s regulatory expertise and its status as a reputed American company, YB might gain easier access to the U.S. market. In addition, the regulatory barrier for transdermal products was lower than that for products that were delivered either orally or directly into the bloodstream. By first introducing transdermal products into the U.S. market, YB could build its brand internationally while incurring minimal risk. If the launch of a transdermal product were successful, there would be potential for brand synergy for YB’s other pharmaceutical products in the future. However, there were also a series of challenges YB had to face. The first challenge was cultural distance, which YB had to overcome in many respects. American customers had different consumer behaviours, and they were not very comfortable with traditional herbal medicine that lacked modern scientific substantiation. Even though the YB transdermal products adopted a form North Americans were familiar with, there was still high potential for customer rejection due to skepticism regarding its herbal contents. 33 For use only in the course SMU Strategic Management at Nova Scotia Community College taught by Edward McHugh from September 10, 2018 to December 03, 2018. Use outside these parameters is a copyright violation. Page 11 9B06M088 YB also lacked international marketing experience. Even though YB had been building up its marketing capabilities, these efforts were confined within China. Despite an overseas department that was established in 2002, the scope of business of the department was still very limited. This lack of international experience could prove to be a big hurdle to surmount by a long-time domestic firm. Even if YB hired local sales personnel, the management of this personnel could still be a big challenge. On the other hand, entering into a foreign market could provide YB an opportunity to gain precious overseas operations experience. Yet another challenge was the gap between the levels of economic development in China and the United States. Thus, the marketing expense would be very high in the U.S. market, imposing a burden on a developing country firm that was defending and expanding along both the product and market dimensions. THE PRODUCT DIVERSIFICATION OPTION: ESTABLISHING A HEALTH CARE DEPARTMENT Concurrent with the 3M option, YB was also faced with another option. According to the “one core and four growth areas” strategy, YB should not ignore further strengthening its core business. Even though internationalization was one of its growth strategies, YB had to be cautious because it lacked the necessary international experience. In the foreseeable future, the majority of its revenue would still be generated from the Chinese market. Therefore, YB had to maintain a focus on its domestic market. Because many of YB’s products had reached or were reaching maturity, YB needed to further diversify its product line and extend its brand to seek new growth opportunities. In 2003, YB was considering the feasibility of establishing a health care department to diversify into health care products. One such product was Baiyao toothpaste. YB came up with this idea based on two facts: 1) many customers already used Baiyao powder to deal with dental bleeding and 2) many multinational pharmaceutical companies offered health care products, including toothpaste. First, even though Baiyao had been formulated for the purpose of curing wounds and injuries, customers had been extending its use in innovative ways. Since its formulation, Baiyao had been used by people for every kind of disease related to blood or bleeding. People had been using Baiyao in its powder form for curing periodontitis and gingivitis for many years, even though the powder form was very inconvenient to use in these cases. By formulating a toothpaste as the carrier to deliver the medicinal content, the customer needs could be better served. Secondly, many international pharmaceutical companies had health care products. Johnson & Johnson (J&J), which had very strong presence in China, was one such example. The sales of J&J in health care products made up approximately 18 per cent of its total sales, and the net revenue had been increasing steadily. Health care products did not cannibalize J&J’s main products; on the contrary, they strengthened J&J’s brand equity by brand synergy. J&J’s health care brands, such as Johnson’s Baby, Band-Aid, Neutrogena and Tylenol, made J&J even more visible to customers. YB thought that it could learn from these multinationals by leveraging its own brand. A successful health care product (such as a Baiyao toothpaste) affiliated with YB could potentially add to YB’s brand equity. If foreign multinationals all adopted this approach, YB reasoned it might work in the case of YB too. Diversifying into health care products could also increase YB’s economy of scope and/or economy of scale because a Baiyao toothpaste would share some value chain activities with its original products. Brand extension might bring about greater production and marketing efficiency and lower promotion costs. 34 For use only in the course SMU Strategic Management at Nova Scotia Community College taught by Edward McHugh from September 10, 2018 to December 03, 2018. Use outside these parameters is a copyright violation. Page 12 9B06M088 Another potential benefit of product diversification was that it offered an opportunity for YB to build its capabilities. Because YB aspired to be a Chinese multinational in the global pharmaceutical industry, it had to build capabilities. In the past decade, YB had been building up its capabilities in both the product and market dimensions and along the value chain. To compete in the new area of affiliated health care, YB needed to build capabilities in this area, otherwise YB would not be on par with the multinationals, even in the Chinese market. However, this option did have several weaknesses. Although Baiyao toothpaste would have medicinal content, the value chain activities that could be shared were few. Few health care products were related to YB’s current businesses. New production facilities would have to be built sooner or later for each health care product. Health care products did not even share sales channels with the existing products. YB was a traditional herbal medicine firm, and it was not familiar with the sales practices in the Chinese daily chemical industry. YB would have to establish new distribution channels different from that for its medicine-related products. In addition, the potential intense competition could not be ignored. The toothpaste industry was dominated by multinational firms, such as Colgate and Procter & Gamble (P&G). The competition was already intense and profit margins were very low. YB was in no position to compete with these giants on their turf as a new entrant. On the other hand, if YB tried to avoid direct competition by pricing the toothpaste to target the higher end, it would then only occupy a niche market. Yet another potential problem was product cannibalism. Toothpaste had been used by Chinese customers for various topical uses in the past. Some even used toothpaste to clean utensils. There was no guarantee that consumers of Baiyao toothpaste would not use it for other external uses and consequently cannibalize the markets of existing products. Lastly, there was the problem of brand contagion. Because toothpaste was not in YB’s core competence, potential failure of toothpaste might cause damage to YB’s reputation overall. As such, YB had to make sure that the new product would succeed. The success of Baiyao toothpaste would not only affect the fate of the health care department, but would also affect YB’s brand equity. THE DECISION The year 2003 was an important one for YB: It marked one year since YB had established i...
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